No Way to Sugar Coat Today’s Report

Jun252014

The Bureau of Economic Analysis (BEA) significantly downgraded its estimate of real gross domestic product (GDP). According to BEA, real GDP declined at an annual rate of 2.9 percent during the 1st-quarter 2014. BEA had previously estimated that real GDP declined at an annual rate of 1.0 percent during the quarter.

The decline marks the worst quarterly performance since the 1st-quarter 2009 when real GDP declined at a 5.4 percent annual rate and is the 4th worst quarter in the last 30 years.

Private forecasters have previously estimated that the unusually cold weather may have subtracted as much as 1.4 percentage points from growth in the 1st-quarter. Those same forecasters expect a bounce back in the 2nd-quarter. Even if growth rebounds to 3.5 percent in the 2nd-quarter, the annualized growth rate for the first six months of the year would come in at under 0.5 percent.

Today’s revision means that the growth gap of this recovery compared to the average of other post-1960 recoveries expanded to $1.6 trillion and the gap compared to the strong Reagan recovery of the 1980s grew to $2.2 trillion. The cumulative lost output in this recovery compared to an average recovery stands at $4.0 trillion and $6.4 trillion compared to the Reagan recovery.

During 19 quarters of recovery, real GDP has grown by at an annualized rate of 2.1 percent compared to an average of 4.1 percent in other post-1960 recoveries and 4.9 percent during the Reagan recovery. In order to catch up to an average recovery, real GDP would need to grow at an annual rate of 6.5 percent for the remainder of President Obama’s term in office. To catch up with the Reagan recovery a growth rate of 8.6 percent would be required for the remainder of the President’s term.

One of the major changes between the advance estimate and the third estimate of real GDP was the downward revision estimated personal consumption expenditures (PCE) on health care services. In its advance estimate, BEA estimated that real PCE for health care services grew at an annualized rate of 9.9 percent adding 1.10 percentage points to growth. BEA’s third estimate reflected an annualized decline in the category of 1.4 percent, subtracting 0.16 percentage point from growth. Of the $122.4 billion decline in estimated real GDP from the advance to third estimate more than 40 percent resulted from the downward revision by $49.7 billion in real PCE for health care services.

It appears, but is uncertain to what extent, that this may be partly the result of BEA misestimating the impact of the Affordable Care Act.